INREV's survey of investment intentions in association with IPE Real Estate identifies the increasing importance of corporate governance and quality management as tools to weather the current storm. Andrea Carpenter reports
While the credit crunch is clearly on the minds of players in the non-listed property market, the INREV Investment Intentions Survey 2008 shows that the current financial climate has not dampened institutional investors' enthusiasm for the sector. However, respondents are already setting out their priorities in this new climate with the results showing that they will place an increasing emphasis on the sector's ability to provide access to expert management. The topic of corporate governance has also risen quickly up the agenda.
This was the fourth annual survey by INREV and responses were received from 112 companies working in the industry, of which 96 were INREV members. The survey was sent out last October and received responses from 66 property fund managers, 34 investors and 12 fund of funds managers. The investors represented a total of €104bn invested in real estate globally.
Investors responding to the survey continue to be upbeat about real estate investments, particularly the non-listed sector, which indicates that taking a long-term view they continue to have faith in the non-listed sector.
Despite the financial uncertainty, 82% of investors expect to increase their level of exposure to the non-listed real estate sector in 2008, up from last year's figure. Some 11% expect to retain their current level of exposure, while none plans to reduce it.
This increase is mainly at the expense of direct real estate, with 38% of respondents expecting to reduce their allocations. In addition, 53% of respondents expect to increase their joint venture activities. Putting this in context with the rest of the real estate industry, 58% of investors expect to increase their allocation to the listed real estate sector.
This was the first year that the survey asked about target rates of return, with investors looking to achieve a 10.13% rate of return. This figure stood at 11.5% for fund of funds managers. Managers creating product are on average looking for a target rate of return of 8.1% for core funds, 11.82% for value added and 17.03% for opportunity funds.
The range for core funds was the smallest among expected returns for funds by managers and had a standard deviation of 1.67. The highest standard deviation, at 4.05%, was among the opportunity funds but this also had the largest range and a smaller sample.
When asked about trends for 2008, it is not a surprise that the biggest issues for the non-listed property market relate to the impact of the credit crunch on the availability of debt and refinancing and its implications for the market in terms of repricing and upward yield movements. The survey coincided with the initial tightening of global credit markets last autumn, so the full impact of the crisis might not be reflected in the survey results. Nevertheless, participants in the non-listed funds market generally believe that they are well equipped to weather the current financial market uncertainty.
It is here that there is a clear message from respondents that the changing climate will clearly separate the good managers from the bad. Even the credit crunch is not expected to seriously damage quality managers' prospects; many felt that those with proven track records and stable investment plans should be able to secure finance at reasonable rates and many feel there is still ample liquidity for the right projects. The sector also benefits from the alignment of interest between investors and fund managers, which some feel will make it easier to weather the storm, if not take advantage of it.
This expectation of manager performance highlights the need for reliable benchmarking, which makes it increasingly important for fund managers to contribute performance data for the INREV Index. Data collection for the 2007 index begins in January, with the index launched in April.
The flight to quality management is easily seen when looking at the factors which aid the popularity of non-listed funds for 2008. More than 90% of fund of funds managers and more than 80% of investors rated this as one of their top reasons. In addition, 47% of investors and 63% of fund of funds managers said this factor had increased in importance as the quest for alpha continued.
It was also reflected in factors considered most important for fund investment, with 92% of fund of funds managers viewing the manager's local presence as the most important. Notably, all groups say that the relative importance of the manager's local presence has increased significantly, which might reflect the view that more difficult market conditions will demand greater understanding of local markets.
Leverage also no longer holds the key; respondents talk of prudent financing and that the market has returned to the merits of good real estate expertise and not just good financing. This is supported by the survey results, which showed that 49% of managers now see access to leveraged instruments as less important than last year, although that view was not shared by most funds of funds and investors.
The second theme to come through relating to the credit crisis is the acknowledgement that corporate governance will be of increasing importance in 2008. The view is that there is likely to be a growing premium on transparency and efficient management in the coming years. Almost one-third of investors and more than half of managers said corporate governance had increased in importance when considering fund selection. For the same reason, substantially more weight is placed on adherence to INREV's guidelines, with more than 40% of each respondent group saying the guidelines had increased in importance.
The results of this survey have also confirmed non-listed funds' ambitions globally. Asia is the main target, with a particular focus on China and Japan. The US also remains popular with all three respondent groups, while appetite for India over the next two years outstrips many other locations.
The pioneering nature of funds of funds seems then bullish on all locations, with the significant exception of Japan, which is comparatively mature in the region. Managers' intentions to launch new vehicles in Asia and the US appear far less ambitious, which might reflect recently launched vehicles not yet being fully subscribed or the provision of vehicles by domestic players. In addition, it is likely that respondents had a European focus.
A theme for 2008 and beyond looks likely to be Latin America, which gained the most mentions under the ‘other' category, with Brazil and Mexico leading.
In Europe, France surpassed Germany for the first time as investors' favourite location in 2008, with 56% of investors citing it as a preferred location. However, managers and funds of funds did not share investors' enthusiasm for France, with only 32% of managers and 17% of funds of funds citing it as a preferred location. All three groups were more consistent on Germany; its attractiveness has improved with 53% of investors but declined in the view of 42% of funds of funds and 48% of managers. In general, investors continue to favour the largest and most transparent property markets: Germany, France and the Nordic region. The UK is not included on this list, but that is not surprising with capital values falling.
Investors also view Russia and Ukraine increasingly favourably, ranking them ahead of both central and eastern Europe, which were identified as separate areas for the first time this year.
Most investors believe their favoured markets are adequately supplied with fund products, according to a new question added to the survey this year. In contrast, only half of fund of funds managers consider the supply to be adequate, and fully 42% see it as inadequate. This dissatisfaction likely reflects funds of funds' greater enthusiasm for emerging markets compared with investors and fund managers.
It is the second year that fund of funds managers have been separated out as a respondent group and this year the results really reflect the dynamism of this part of the market. For fund of funds managers it is all about finding the best opportunities in the upcoming locations, preferring more value added and opportunity funds and fewer core vehicles. A fund's ability to allow the fund of funds manager to gain exposure to expert management and international diversification is key. They are also the group most likely to complain about the number of products available from managers to meet their broad investment intentions.
However, one area that fund of funds managers shy away from is alternative real estate sectors. Half the sample does not have a mandate in any alternative sector, with a few offering products to gain exposure to underlying infrastructure and real estate derivatives funds.
The majority of fund of funds managers also show very little interest in these alternative sectors, ruling out real estate hedge funds and debt funds with, again, some interest in infrastructure and derivatives. This probably suits many fund managers, with at least 80% of respondents saying it is unlikely that they will launch funds in any of these areas.
The survey also explored the obstacles to investing in non-listed real estate vehicles and, like last year, a perceived lack of transparency and market information on non-listed vehicles was cited by all three groups as the single biggest disadvantage. Significantly, though, all three groups see an improvement in this area. And although more funds of funds and investors cited transparency and market information as an obstacle this year than last, investors had few complaints about liquidity.
Out of a list of criteria for selecting a fund, investors and managers rated fund style as the most important, an increase from last year's results.
Of the various fund types and styles analysed, nearly 60% of both investors and fund of funds managers prefer to invest in value-added funds rather than core or opportunity funds. The proportion favouring value-added vehicles has increased since last year's survey, while the number preferring core funds is surprisingly small considering the emergence of adverse direct market conditions. However, this result is supported by the fact that around 40% of investors and fund of funds managers said that enhanced returns were one of the main reasons for investing in the non-listed sector.
A significant percentage of both investors (35%) and funds of funds (25%) prefer opportunity funds this year, a dramatic increase from last year. More than half of the investors surveyed (59%) expect to increase their non-listed real estate allocations to opportunity funds and 55% expect to increase their allocation to value-added funds. Funds of funds are expecting a similar growth in activity, with 64% favouring value-added investments.
As in previous years, all of the groups surveyed showed a strong preference for closed-ended vehicle structures over open-ended structures. Nevertheless, a significant percentage (42%) of funds of funds favour open funds. Specialised rather than diversified vehicles are also favoured, as they have been in the past. In general, all three groups surveyed are in agreement about their preferences. One notable exception concerns the number of investors participating in a fund. Investors prefer a small pool whereas managers prefer a larger pool, a result that is not particularly surprising.
Asked about the expected performance of real estate sectors in 2008, investors find the office and retail sectors similarly appealing, with 74% saying that they would invest in either sector. This result represents the return to favour of retail after falling behind offices last year. Funds of funds tend to favour retail (83%) over offices (67%) , while 64% of managers prefer offices.